A CEO – chief executive officer – is the highest ranking officer in the company. The CEO is in charge of management and organization. This person is often highly educated, with experience and according to research taller than average. If you close your eyes and imagine a CEO – you will most likely picture a man, tall, maybe gray hair or dark hair in a suit. This person is not the one with the final word. The CEO is hired by a board of directors to execute on their visions and goals. But of course the CEO does have power. But what impact does the top level management have on the company when downsizing?

The extra expenses in management

Let’s say that we have a small organization with 10 employees, there is one boss in charge. But since this is a small company he or she is on the floor working, serving customer, packing goods or selling as well. And the staff might take turns on administrative routines. People know what is going on and can adapt and change according to different challenges fast. If the manager earns about 2-3 times as much as the rest. Management will soon hold 25 % of the total salaries in the company. And as they grow, they need more managers, more team leaders, and leaders to lead the team leaders and leaders of different departments and functions. And before you know it, leadership might take 35 % of the total salaries in a company. So what is my point?

In downsizing times, who needs to go first?

These leaders sit in meetings and discuss who needs to go, to save money. They start to cut back on staff, the people working in the warehouse, in the shops, in customer service, in accounting, creating a heavier burden on those left behind. So what did they just do? Let’s say that a company had 1000 employees and 100 leaders. They decide to cut back on 100 employees, so they divide it to each team leader to cut back with one each or so. They increased the workload on the remaining staff, and increased the share of pay for management from 23 % to 25 %. They ended up spending a higher percentage of money on the people NOT creating the values.

So to do some math…

Let’s say that this company of 1000 employees and 100 managers – were the managers make 3 times as much as the rest. What if they rather said in the board room: We are leaders, and in this though times we want to reduce our salary by 33 %, and only make twice as much as the employees. This would save the company just as much money as if they would lay off 100 employees. And then they could go out to the workers and say: Dear employees, our company is in a rough spot, to save your jobs, we have decided to cut back on management salaries by 33 %. We hope you can help us to save more money, and we are looking forward to your contribution. It would mean a lot for the company if you would not ask for an increase in salaries this year. I guess the worker unions would easily agree to these terms, and save the company another few percentages as well or even suggest a smaller pay cut to themselves.

Next up, motivation

Now, the management team have committed to make this work, and they are leading by example. They even managed to prevent layoffs. The employees understand what is going on. And the management team also said that they would see how they can make a leaner and more effective management team. Then an inspiring leader would rally the workers to find their ways to save money and to increase productivity. And spend some of the savings rewarding incentives that increase productivity and profits. According to studies, 68 % of the engaged employees feels that they can contribute in a positive way for the company, while 19 % of the disengaged employees feels the same. But the scary part is: About 29 % of the workforce is engaged, and about 17 % is disengaged. And the rest, they have a lot of potential. Increasing efficiency on average about 5 % on all employees in a company staffing 1000 people might have a huge effect.

In what scenario would you as a leader create the highest motivation? Where you just laid off 100 co-workers? Or where you took a major cut in your own salaries first to save their jobs? Where you as a leader committed to creating a more efficient management team? If you want to motivate staff, giving them more to do, creating uncertainty for their future jobs and saying that they need to save money, well then you miss by a mile or five. Do not just look at numbers, remember that all decisions impact motivation on your entire staff, and make sure you make the decisions that increase motivation.

Giving your management team a bonus for laying off 100 employees might not work as intended huh?

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6 Commentson "Impact of leadership when downsizing"

@DarinGerdes Hi – I have seen numbers like this somewhere before – and it is very interesting to know about these things when faced with such actions at work. Thank you for providing a valuable addition to this post. 🙂

Frode,
You have a lot of valuable content on this blog. We are of like mind. I can verify what you are saying in this post.
From my Textbook:
Many downsized employees have brought lawsuits against their previous employers. In one study of downsized employees, nearly a quarter spoke with an attorney. The best predictor of legal action was how employees perceived their treatment. Sixty-six percent of those who believed they had been dealt with unjustly considered a lawsuit. In contrast, only 16% of those who felt they had been treated justly considered legal action.[i] Additionally, managers are often provided legal counsel that they should not apologize for legal purposes, but the research shows that the apology may actually reduce the risk of legal action. [ii]
[i] Cropanzano, R. & Bowen, D. (2007, Nov). The management of organizational justice. Academy of Management Perspectives 21(4), 43. Retrieved from http://journals.aomonline.org/amp/
[ii] Cropanzano, R. & Bowen, D. (2007, Nov). The management of organizational justice. Academy of Management Perspectives 21(4), 43. Retrieved from http://journals.aomonline.org/amp/
Keep up the good work!

Hi, my name is Frode Heimen

Thank you for reading my blog, I really hope you will enjoy my content. I am a Norwegian Customer Service Expert with a passion for leadership, motivation and business in general. I have 20 years of first hand in the office trenches experience. My writing and sharing started back in 2007 for your amusement, learning and entertainment. In return I hope to be challenged and I love good discussions. I currently work as a CEO selling software solutions to veterinarians in Norway.